When asked about the biggest mistakes professional service firms make with hourly rates, author and VeraSage Institute founder Ron Baker replies, “Having them.”
He says the billable hour is “not a good way for professionals to charge for intellectual capital.”
Speaking at the Association for Accounting Administration Ohio Chapter Annual Meeting at Brott Mardis & Co., CPAs, Baker touted value pricing, a concept in which firms charge before the work is done, equal to the value delivered to the client.
“Value is like beauty; it’s in the eye of the beholder. It’s subjective, so a price is nothing but any business’s attempt to put an objective price on a subjective value,” Baker says.
Value, he says, is not based upon how long it takes the professional service firm to do the work.
“I could have an epiphany in the shower in one minute and save my client $1 million,” he says. “Charging by the hour doesn’t allow me to capture the value I created.”
Baker says that without fixed professional service fees, clients can’t budget for expenses.
“Everything we buy as a customer, we know the price up front before we buy, not after, and yet … anybody that bills by the hour, they have to wait to do the billing until the job’s done to collect all the hours. That’s a really bad time to bill the client,” he says. “It’s like a grocery store billing you after you’ve taken the groceries home and eaten. It just doesn’t make any sense.”
Baker says the billable hour is not fair to the client because if one team member takes twice as long as another to do something, the client pays for that.
“The thing that makes value pricing completely fair, ethical and moral is the fact that you’re giving the client the option before you begin the work to either accept or reject the price,” he says. “It’s customized to each client.”
Billable hours have taught generations of lawyers and accountants that they sell time rather than value and to focus on efforts rather than on results. It also puts stress on employees who have to meet annual quotas.
“It destroys the quality of life,” Baker says. “It kind of bifurcates your life into billable/nonbillable, and if I’m nonbillable, I’m always guilty about being nonbillable. It’s just not an accurate reflection of the value that you’re providing to the customer.”
He says billable hours also put a ceiling on a firm’s income.
“There are only so many hours any of us have in a week, in a year, in a life,” he says. “Bill Gates wouldn’t be a billionaire and Henry Block wouldn’t have been a millionaire if they had that mentality.
“The firm wants to bill as many hours as they can, and the client wants to solve their case as effectively as possible. How can you have an ethical pricing system that misaligns the interests that much?”
A good way for firms to take on the challenging transition from billable hours to value pricing is to create a chief value officer (CVO) position. The CVO is responsible for pricing in the firm, as well as for the value created for the customer. This officer serves as the eyes, ears and mouth of the customer and discusses value before a job and after a job in post-mortem reviews.
“Removing the timesheet and putting in place metrics that focus on the results of these employees, rather than measuring efforts, makes for a healthier place to work and a better quality and balance of life,” Baker says.
HOW TO REACH:
VeraSage Institute, (415) 927-7114 or www.verasage.com
